Motivating ESG Activities Through Contracts, Taxes and Disclosure Regulation

52 Pages Posted: 27 Jan 2022 Last revised: 17 Oct 2022

See all articles by Jonathan Bonham

Jonathan Bonham

The University of Chicago Booth School of Business

Amoray Riggs-Cragun

University of Chicago Booth School of Business

Date Written: October 15, 2022

Abstract

Using a model where firm managers can influence the entire distribution over financial and ESG outcomes, we examine how ESG activities can be motivated through 1) contracts, 2) taxes and 3) disclosure regulation. Executive compensation contracts can produce changes in a firm's ESG activities, but these changes are limited by how much shareholders actually value ESG. Taxes can align shareholder objectives more closely with societal objectives, but only to the extent that ESG outcomes can be reliably measured; moreover, taxes can have potentially unintended consequences when the taxed outcome is correlated with other outcomes. Finally, disclosure regulation can empower markets to partially self-discipline by providing information about firms' ESG technologies, as this enables powerful ESG-conscious firms to compete against brown firms and cooperate with green firms. However, disclosure regulation can hurt ESG outcomes if powerful firms do not value ESG, and it has little effect when market power is disperse.

Keywords: ESG, CSR, shareholder welfare, taxes, ESG disclosure regulation, optimal contracting, executive compensation

JEL Classification: D86, M41, Q56, Q58

Suggested Citation

Bonham, Jonathan and Riggs-Cragun, Amoray, Motivating ESG Activities Through Contracts, Taxes and Disclosure Regulation (October 15, 2022). Chicago Booth Research Paper No. 22-05, Available at SSRN: https://ssrn.com/abstract=4016659 or http://dx.doi.org/10.2139/ssrn.4016659

Jonathan Bonham

The University of Chicago Booth School of Business ( email )

1101 East 58th Street
Chicago, IL 60637-1561
United States
7738344748 (Phone)

HOME PAGE: http://https://www.chicagobooth.edu/faculty/directory/b/jonathan-bonham

Amoray Riggs-Cragun (Contact Author)

University of Chicago Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

HOME PAGE: http://www.riggscragun.com/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
836
Abstract Views
2,105
rank
43,264
PlumX Metrics